Africa Gets Fit For Better Business

Africa Gets Fit For Better Business

In March 2007, Omari Issa found himself the first and only employee of the newly created Investment Climate Facility for Africa (ICF), a unique public-private partnership forum set up to deliver a better investment climate in Africa and grow the African economy through private sector investment. Five years on, he is the CEO of a highly successful small team that has facilitated ground-breaking changes in the African business environment, making it an easier place to do business, particularly for SMEs. He explained the thinking behind ICF’s success to African Business editor, Anver Versi.

Over the last few weeks, the world has tuned in to the London Olympic Games where thousands of competitors from hundreds of countries have strained every sinew and every ounce of skill to win medals. The Games are unforgiving – they ruthlessly sort out the wheat from the chaff. The process actually began before any of the competitors arrived in London – for every competitor who lines up even at the preliminary stage, scores more never make it. They are weeded out long before because they have not made the necessary standard.

The one characteristic of all the medal winners, and of those that make the final stages of each event, is the enormous amount of time, energy and planning that goes into preparation. Preparation, competitors will tell you, is paramount.

As it is in the world of sport, so it is in the world of business only more so as the competition in this sphere is utterly ruthless. For business champions, the rewards are truly enormous while the losers are left to wallow in the shallows. But what we see of the world’s economic winners – the US, Europe, Southeast Asia is only the tip of the iceberg. Nine-tenths of what makes champion economies is submerged, often hidden from view but it is this nine-tenths that determines who will progress and who will be left behind.

This substratum, which is the foundation on which economic success is built, can be summed up as the ‘business environment’ as occurring in each country. Without a competitive business environment, you might as well say goodbye to any chances of success.

Over the past 50 years, the business environment in most of Africa has not only not been competitive, it has more often than not, been counterproductive. There are many reasons for this – some as a result of outside influences, some self-inflicted. Suffice it to say that for a long time after independence, Africa was not considered strong enough to compete on equal terms with the rest of the world. It was assumed that to stay afloat, the continent needed outside help in the form of aid.

Aid then quickly became a crutch and the competitive spirit was more or less driven out of the continent except in a few cases. The business environment stagnated and fell into decay. Nationalisation, inefficient state-run companies, deteriorating infrastructure, political meddling, overweening self interest, institutional corruption, bloated and unnecessary bureaucracy and numerous other ills all joined forces to turn the world’s most naturally richly endowed continent into its poorest.

Africa’s decline also coincided with an unprecedented explosion in investment capital which moved with great speed across the globe. With globalisation, technological advances and the rise of giant multinational corporations, trillions of dollars were invested wherever it was deemed they could make a return.

Hardly any this flood of investment touched Africa – the one region that most desperately needed sustained investment to pull itself out of poverty and begin the process of wealth creation. The reason was simple – the business and therefore investment climate in Africa stank. There was investment in the extractive industries – oil and minerals which could be ring-fenced and isolated from the main body of the economy – but hardly any in industry or services, the main providers of growth and jobs. While many countries made strenuous efforts to attract investors through conferences, seminars and via publications, few were biting. Potential investors came up with long lists of deterrences – conflicts, political instability, compromised judiciaries, lack of transparency, opaque regulations, lack of infrastructure, gross public inefficiencies, strangulating red tape, the world’s highest cost of moving goods, the snail-like pace of getting things done and on and on.

In addition, they pointed out that the global competition for investment was fierce and the battle to attract the investment dollar was cut-throat. Advanced nations used every trick in the book, including roping in political heavyweights and cultural and sporting icons to roll out the red carpet to investors; whole departments worked tirelessly to try and channel some of the investment flows in their direction, and vast exhibitions and fairs were marshalled to convince investors to take a chance in their countries.

Pitted against such competition, Africa had as much chance of winning the investment race as I have in beating Usain Bolt in the 100 metres. But no condition is permanent. Things are changing. Africa is getting fitter – thanks in no small measure to the work of a relatively small organisation, the Investment Climate Facility led by Tanzanian Omari Issa.

Preparing the ground

“Clearly something had to be done if Africa was to get the investments it needs,” Omari Issa, CEO of the ICF, told me. In an earlier life, Issa had been the executive director and chief operating officer of Celtel, one of the earliest and most successful mobile telephony companies in Eastern Africa. Celtel, then led by the now legendary Mo Ibrahim, had flown in the face of received wisdom and invested in Africa when everybody else was leaving it. The company made a fortune and in the process learnt a great deal about doing business on the continent and the hurdles that investors had to jump over or skirt around.

The ICF’s main function is to improve the investment climate in African countries. To take the Games analogy a little further, it acts like a coach to raw talent, eliminating faults and substituting performance-enhancing habits. So far the improvements it has managed to register have been quite remarkable.

“The genesis of the ICF goes back to the Africa Commission in 2005,” says Issa. “One of the recommendations was that in order to alleviate poverty and to create jobs, the economies needed to grow, as opposed to alleviating poverty through development aid. But they went further and said that to grow the economies, you actually need investment and the investments would have to come from the private sector, local or foreign, but it had to be the private sector.”

Since the private sector will only invest in business environments that are conducive, it followed that if the business climate in African countries could be made more conducive, the chances of the private sector investing more would increase. This would lead to wealth creation and jobs and in the process alleviate poverty.

The question was how to go about improving the investment climate in Africa? “The solution was to set up public-private partnership that would work with willing governments to improve their investment climates and hopefully the private sector would respond by investing,” said Issa.

At the Gleneagles G8 summit, the public and private sectors pledged to support the facility; it was introduced at the World Economic Forum in Cape Town in 2006, funding began to flow and Omari Issa was appointed the CEO. “ In March 2007, I set up office, recruited staff and started operations in July the same year.”

But the new organisation had not reckoned with the continent’s ability to trip things up. The first problem was finding an African home for the ICF. It had been decided to set up the organisation as a trust and as such it needed flexibility in business conduct. The board looked at Botswana but found the legislation too restrictive; Mauritius demanded a number of directorships and the South African bureaucracy proved too cumbersome. “The irony of it all is that here was a facility that was supposed to improve the business environment for the continent, yet it was very difficult for the facility itself to be registered in an African country – that just tells you how difficult the business environment is in African countries,” said Issa.

Eventually, Issa recollects, the government of Tanzania came forward and asked the board what its requirements were. Within 15 days, the Tanzania government gave the new organisation the go-ahead and it was registered in the country.

Plotting the strategy

Setting up the facility was the first step in the bid to improve Africa’s competitiveness in the investment race. The second, crucial step was how to go about such a daunting project. Issa recollects: “I was the only employee at that time in July, 2005 and together with the board of trustees, we discussed the strategy and came to the conclusion that the business environment in almost each and every African country was difficult. For a small facility like ours, it would be very difficult to try and improve the investment climate in each and every African country over a period of seven years, which was set as the lifespan of ICF.

“So we agreed that the best strategy would be to identify 10 to 12 countries that were most receptive, that were willing to make the necessary improvements in the investment climate and once we were successful in those countries then we could use them as demonstration to try and convince other countries to do likewise, and that is what we did.”

It was essential that the governments of the countries targeted had to be receptive to the concept. This implied that they realised that their business climates needed improving and that they could be improved. It was also essential that the perspective of the private sector, on whom so much depended, was fully taken into account. Areas that required, and still require, performance improvements or overhauling include the nuts and bolts of doing business – registration, land registration, customs clearance, taxation laws, judiciary, movement of goods, arbitration and so on.

What set the ball rolling? I asked Issa. “When we started, the initiative had to come from us because people didn’t know who we were. What we did at the beginning, (as we continue to do in countries where we are not yet active) was go to a country, set up meetings with government officials and the private sector through business associations like chambers of commerce, law societies, bankers’ associations and so on.

“We make presentations at different conferences, the World Economic Forum, the African Development Bank annual meeting, the World Bank annual meetings, etc. We interact with both the public and the private sectors in order to determine what the priorities are, especially from the private sector point of view. The government may want to do something, but the private sector may say hold on, what we really need is such and such.”

Issa illustrates this by giving an example of the ICF’s experience in Zambia. When the ICF team went to Zambia, it had a long list of potential projects but what the private sector wanted sorting out first was the judiciary. “They told us it took a very long time to clear disputes through the commercial courts. Could we help speed things up? Once that was in hand, the private sector then said the next priority was the revenue authority because it was difficult to file tax returns and make payments. So we made that the next priority. That is how we operate everywhere we go – we respond to what the parties involved consider their priorities.”

The first project, approved by the board was in Rwanda, followed by projects in Tanzania, Senegal, Burkina Faso and Mauritius, which were the first countries to invite the ICF. Within two years, the organisation was active in 12 countries and the list has now grown considerably. This included countries like Morocco which is not members of the African Union.

Commercial justice top priority

In terms of what countries regard as their number-one priority, Issa was surprised to find that commercial justice topped the list. “ We thought it would be maybe number three or number four in terms of demand but actually everywhere we have gone we found that the private sector says we can live with 1930 legislation, we can live with the law regime of 1950 but we want a judiciary that is transparent, we want a judiciary that can decide on cases quickly and fairly. So you find that we’ve done these projects in several countries, Burkina, Sierra Leone, Rwanda, Tanzania, Zambia, Mauritius, Mali, Togo, in one form or the other.

Rwanda, for example, did not have a commercial court at all. The same courts listened to criminal cases, divorce cases and all other judicial matters. Neither the lawyers nor the judges had been trained to try commercial disputes.

ICF arranged for the lawyers and judges to go for training. “When the judges went for training for the first two years , it became necessary to import judges. “We looked at Canada, Switzerland, Belgium and Mauritius and settled for the judges from Mauritius,” Issa said. “And the irony of this is that after that project in Rwanda, the Mauritian judges went back to Mauritius and said there is something good about ICF, and we then got a request from the Mauritian judiciary to go and help them. So you got a full circle.”

In 2007, taking a case to court used to take five to six years, now it’s just a few months, Issa told me.

Even faster options are alternative dispute resolution (ADR), which seek to find resolutions for commercial disputes through arbitration rather than the more expensive and time consuming court route.

The outcomes of the arbitration are legally binding – “otherwise they would not be much use!” adds Issa. Another route is mediation, where a judge seeks to find a compromise between the parties. These procedures have been rolled out in Togo and Mali and the ICF is now working with Rwanda. Mauritius launched a mediation centre in 2011: “They try to resolve cases within 30 days, preferably between seven and 15 days, against a minimum of 180 days through the courts.” In a mediation centre, judges are appointed by the judiciary. In Togo, once the ADR centre was up and running, the ICF returned to deal with the commercial court.

Issa told me the process has been speeded up by introducing state-of-the-art technology that makes it more efficient and transparent. Earlier, judges had to write down everything by hand. “They spent a huge amount of time simply recording the cases before reading through them, making notes and so on. No wonder it took so long.

“Now the judges have computers, the courtrooms have screens so that everything is captured digitally and projected on screen for the public, lawyers and judge to see, and at the end of the day, the transcript is available on CD.”

In Zambia, the ICF provided support to create a digital archive of legal records that is accessible to lawyers and judges wherever they are.

“The message we convey all the time is that the judiciary is independent and should be fair and transparent. Independence is important because if investors perceive the judiciary not to be independent, there will be less investment. You have to ensure that they are fair and resolve cases quickly. This leads to investor confidence, which leads to more investment, which leads to job creation.

“I want to emphasise that we don’t work for a particular investor. We want to address all the issues for investors in that country, so if the judiciary in a particular country is not keen, we cannot force them. We deal with receptive, willing parties.

“On the other hand, if you have support from all sides, public and private, projects can be implemented quickly and you begin to see results in 12 to 18 months. Take Sierra Leone: cases used to take six years, now they take two months because the judiciary is willing, and because the private sector now has confidence in the judiciary, cases are resolved much more quickly.”

SMEs the biggest beneficiaries

By improving the business environment, making it easier and less costly to do business, the biggest beneficiaries are the local investors and, in particular, the small and medium enterprises, “because if it is difficult to resolve a case, if it requires lawyers over a period of four to five years, a small company cannot afford to pay lawyers over that period of time.”

Similarly, streamlining procedures such business registration has enormous cost-saving benefits. “If it costs a few hundred dollars to register a company and takes several months, the small and medium entrepreneur will not go through that, it will operate informally. If they don’t have collateral, and collateral is really a title to a piece of land, they are not going to access credit, so by improving the business environment, making it easier to start a business, you will bring in several people who are operating informally and some who were probably never contemplating getting into business to actually do so.

“When we started in Rwanda in 2007, it cost $440 to register a business, it took about 30 days and had 13 different procedures. In 2007, hardly any new companies were registered. Fast forward to 2010/2011 and registering a business has come down to a maximum of two days, it takes only two procedures and costs just $25. Last year, online registration was made free. So in 2011, 6,000 new companies were registered.

“The incentive is there, they realise it’s easy. In a matter of hours your company is registered and then you have collateral, because in parallel we are also supporting the titling of land, so registration of land also becomes much easier.”

Business, land and construction permits

Land registration is one of Africa’s major problems. “For the majority of Africans, the biggest asset they have is land. Yet only they and their neighbours know that it belongs to them, they don’t have official papers, so they can’t go to a bank and pledge the land as collateral.

“ We have worked with three receptive countries, Rwanda, Burkina Faso and Sierra Leone, and are looking at projects in other countries. In Burkina, in the last three years they have issued more titles than in the previous 30 or 40 years. The project is to help with business registration and simultaneously construction permits. In many countries, you can have the business licence but to get the construction permit is also a process.

“In Burkina a permit used to cost close to $3,000 and even if you pushed very hard, about seven months. Now you can get that permit for $480 in less than three weeks. So you can start a business, get the title to your piece of land, get a construction permit, start a business and start construction in the space of two months. You can go to Ougadougou and see the construction industry moving – that’s because the fundamental issues have been addressed, as opposed to shortcuts. “Historically, governments looked at fees for registration of companies as a source of income, as opposed to letting companies begin to operate, collecting corporation tax in the future and allowing more companies to register.

“I’ll give you figures in Tanzania. Most of the tax collected from businesses is from between 500 and 1,000 companies. Independent research showed that between 2.3m to 3m unregistered businesses are operating. So a few hundred companies are paying taxes and millions are not, but they are doing business in an informal way.”

The ICF demonstrated that, in fact, informal companies were actually paying ‘informal taxes’ as bribes on a daily basis. “You have to sweeten this inspector and that inspector – and at any time, a minor official can bring your whole enterprise crashing to the ground,” Omari pointed out. “Once these organisations began to see the situation in this light, they realised that they were actually paying out more in ‘informal taxation’ than they would have to pay formally and without any of the security that comes with formal registration!”

ICF is talking to the African Development Bank to see how it can incentivise those millions of informal businesses to come forward and register and show them the benefits.

Streamlining customs and tax

Another major sticking point for all importers and exporters in Africa is customs clearance of goods, which seems to take forever and involves a bewildering system of form filling.

In Senegal, the ICF worked to streamline and simplify procedures. The process used to take several days and involved seven agencies. People had to fill in forms, take them to one agency, make payments, get it stamped, then go to another agency, repeat the process, answering exactly the same questions on another form, get it stamped and move on to agency number three and on and on.

“After working with the public and private sectors, the procedure has been streamlined, you file your application online, it goes to the seven agencies simultaneously and you get all the approvals, including payment, the same day,” Issa said.

For traders, this has come as a minor miracle. They can now get on with doing business instead of spending the bulk of their time filling forms and rushing from agency to agency.

But what has come as an even greater surprise is that revenue collected by customs has increased dramatically in 2011 compared to 2010. “The commissioner general of customs said the volume increased by around 20% but the incremental revenue increased by $1bn year on year for the port of Dakar,” said Issa. “The reason is that there was a lot of leakage before – some of that $1bn was going into people’s pockets but now it’s going into the government treasury.”

In Kenya, Issa said, leakage – in other words, the money that changes hands – on the route between Mombasa and Kigali, is estimated at anywhere from $4bn to $10bn.

From Dar es Salaam to Rusumo, on the border with Rwanda, there used to be 58 informal roadblocks and trucks on the road had to pay at each of them. Over a distance of 500km in Cameroon, beer trucks were stopped 47 times, once every 11km. The ICF helped to get the checkpoints reduced. “You need to have a willing partner and we got cooperation from the inspector general of police and the revenue authority, all the way up to the Prime Minister and the President. You have to have support all the way.”

Between Dar es Salaam and Rusumo, journey time has been reduced by two days and the cost has gone down because drivers are only dealing with 15 roadblocks. “We are advising people not to pay but it’s an ongoing process, we can’t do it alone. I read in the local paper that the business community are saying they are actually willing to pay a second levy if the goods will be allowed to flow much more quickly because it’s costing them much more.”

The other big advantage of reducing the roadblocks is that the police are now concentrating on the roadworthiness and safety of the vehicles. When the vehicles leave the port of Dar es Salaam, they have GPS installed so they are tracked, reducing theft.

“We have provided police along the route with BlackBerries. We try to sensitise the population by distributing leaflets to truck drivers and having radio programmes giving a number to call if they are asked for money. That revenue could be going into the government treasury helping with rebuilding or maintaining the roads or additional infrastructure such as hospitals.”

Ongoing ICF projects on tax administration in Senegal, Ethiopia, Rwanda, Zambia and Tanzania are helping to modernise legislation so that the process can be automated to allow tax payers to file and pay online. They are encouraging administrations to set up customer care centres. “For them, the notion of customer care is really foreign. They don’t see the tax payer as a customer so now we are beginning to instill that. Now you can call the revenue authority in many countries that we are supporting a minimum of 12 hours a day, and the aim is to make it available 24 hours a day.”

New projects

Three new and, Issa said, different, projects are in train.

First, infrastructure facilitation, “where we looked at a number of countries and ended up with one, helping in the energy and power sector because we believe availability of reliable power supply is key to investment. We are not funding power innovation, we are funding the soft side, the planning aspect, the setting of tariffs, having template contracts for the private sector to invest and regulating a competing sector as opposed to a monopoly.”

Second, “we are facilitating airport transfer in Sierra Leone. It takes you four hours to fly from London to Freetown – and equally long to get from Freetown to the city, unless you take the old Russian helicopters and take the chance. So again, legislation and regulations, safety standards and getting the private sector to invest in the infrastructure.”

And third, “for regional integration, two kinds of projects. In East Africa we are helping the East African Community to harmonise legislation in the five member countries. We have engaged experts to look at and identify priorities. A number of legislations were proposed and we ended up with a priority list that is now being discussed. The five parliaments have to agree, so it’s a consultative process. It’s a slower approach than working with one country.”

And in West Africa, “we are working with OHADA, a group of 17 French-speaking countries, again in harmonising commercial laws. The first phase has been completed, which is streamlining the processes and enacting legislation.

“As an example, in those 17 countries, the average minimum to start a business was $2,000, so imagine a young man or woman coming out of school or university, needing $2,000 as capital, not to mention the fees associated with setting up a company. The legislation has been amended and now you only need $100 to start a business.”

The ICF’s mandate expires in 2014, but, Issa said, “We have started a process, the response has been good; the concept has been proven. Demand is increasing continuously, there is a sense out there that the mandate should be renewed or additional funding to go beyond 2014 should be raised. This is something that should be rolled out all over the continent and I say the biggest beneficiaries will be the small and medium enterprises because they are the ones who employ the most, suffer the most, and they are the ones who will benefit the most if bureaucracy is minimised, cost is reduced and then we can create more jobs in the continent.”

In the first five years of its existence, the ICF has quietly but very efficiently gone about a virtually root-and-branch upgrading of the business climate in a number of African countries, making them fitter, leaner and far more competitive than they have ever been before. The performance results have been startling in some cases. Is it beyond the bounds of imagination that, like for the continent’s world-beating athletes, a little performance-enhancing coaching for African economies will not produce global champions in the not so distant future?

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